Chapter 1. Key terms you need to know

As in any specialized industry, real estate has its own language and its own key terms that you need to know. Some of these terms you may only use once in a lifetime and others may be added to your common vocabulary.

 

 

 

How to

Here is a list of the terms you will encounter as you go through the process of buying a home:

Mortgage 

• • A loan used to purchase a home
  • A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments
    • Mortgages are also known as "liens against property" or "claims on property"

Down payment

• • A required percentage of the sale price of the house
    • The most common is 20% down to avoid paying mortgage insurance payments, but it can be as low as 3% or 5 % depending on the type of loans acquired

Escrow

• • A contractual arrangement in which a third party receives and disburses money or documents for the primary transacting parties
  • It is a trust account held by a third party until a transaction has been completed

Closing cost 

• • These costs are incurred by either the buyer, the seller, or both
  • Closing costs are fees associated with a home purchase and home loan at the closing of a real estate transaction
    • The closing point is when the title of the property is transferred from the seller to the buyer

Earnest money

• • When you write an offer to buy a home, you typically need to show you have skin in the game right away
    • This comes in the form of an earnest money deposit

Equity

• • Home equity, also known as real property value, is the portion of the paid mortgage that the debtor has satisfied or the net increase in the market value of the property

Truth in Lending Act of 1968

• • This is a federal law designed by the U.S. to promote the informed use of consumer credit, by requiring disclosures of terms and costs associated with borrowing money in an attempt to standardize the manner in which institutions calculate such costs

Good faith estimate

• • This is also known as GFE
  • The Real Estate Settlement Procedures Act (RESPA) requires a mortgage lender or a broker to provide a loan applicant with an itemized list of fees and costs associated with applying for a loan to purchase a property

Pre-qualified

• • This is an estimate of the amount of loan an applicant might use as a mortgage based on initial information submitted to a lender

Pre-approved

• • This is a more accurate statement than a pre-qualification of the amount of loan an applicant might use as a mortgage based on additional information submitted to a lender

 

There are other terms commonly used in the home buying process such as principal, interest, amortization schedule, fixed and variable interest rates, foreclosure, delinquent, refinancing, credit rating, and pre-payment penalties. If any of these terms are not familiar to you, take the time to research them or read over our previous modules, so that you can fully understand all key terms used in acquiring a home loan.

 

Practice

Now that you are fully familiar with the terminology, think of paying it forward and discuss your knowledge with a friend of a family member.

 

Congratulations! You can move on to Chapter 2. Components of a mortgage.

To review the full module on Mortgage, click here.